Banco Macro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's third quarter 2022 earnings conference call. We would like to inform you that this third quarter 2022 press release is available to download at the investor relations website at Banco Macro at www.macro.com.ar.french slash relations base infrasource. Also, this event is also being recorded and all participants will be in a listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star, then zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scaramucci, and Chief Financial Officer, Mr. Nicholas Torres, Investor Relations. Now I would like to turn the conference over to Mr. Nicholas Torres. You may begin your conference, sir. Thank you.

Good morning, and welcome to Banco Macro's third quarter 2022 conference call. Any comment we may make today may include forward-looking statements, which are subject to various conditions. And these are outlined in our 20F, which was filed to the SEC, and it's available at our website. So quarter 2022 press release was distributed last Wednesday, and it's also available at our website. All figures are in our Argentine pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29, as established by the Central Bank of Argentina. For ease of comparison, figures of previous quarters have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through September 30, 2022. I will now briefly comment on the bank's third quarter 2022 financial results. Bank of Macro's net income for the quarter was 8.9 billion pesos, 76% higher than the second quarter of 2022, and 34% lower than the result posted a year ago. As of the third quarter of 2022, the bank's accumulated annualized ROE and ROA of 7.7% and 1.9% respectively remained healthy and showed the bank's earnings potential. Net operating income before general and personal expenses in the third quarter of 2022 was 122 billion pesos, 22% or 22 billion pesos higher quarter-in-quarter due to higher income from financial instruments at fair value for profit or loss and higher FX gains. On a yearly basis, net operating income increased 54% of 42.6 billion pesos into higher income from financial instruments at fair value for profit and loss and higher FX gains. Operating income after general and initial expenses was 75.1 billion pesos, 39% of 21 billion pesos higher than the second quarter of 2022 and 101% of 37.7 billion pesos higher than the third quarter of 2021. In the quarter, net interest income totaled 63.5 billion pesos, 3% or 2.1 billion pesos lower than the result posted in the second quarter of 2022, about 17% or 9 billion pesos higher than the result posted one year ago. In the third quarter of 2022, interest income totaled 137.2 billion pesos, 17% or 20 billion pesos higher than the second quarter of 2022, and 50% or 45.8 billion pesos higher than the previous year. Within interest income, interest and loans totaled 55.5 billion pesos and increased 9% of 4.6 billion pesos quarter-and-quarter, mainly due to a 324 basis points increase in the average lending rate. Interest and loans increased 22% or 9.8 billion pesos year-on-year. In the third quarter of 2022, interest and loans represented 40% of total interest income. Net income from government and private securities increased 19% or 12.2 billion pesos quarter-and-quarter, due to higher income from government securities. Compared to the third quarter of 2021, net income from government private securities increased 86% of 36 billion pesos. In the third quarter of 2022, income from brief was totaled 3.9 billion pesos, 358% or 3 billion pesos higher than in the previous quarter, and 3% or 107 million pesos lower than a year ago. In the third quarter of 2022, FX gains, including investments in derivative financing, totaled 16 billion pesos gain, 9.5 billion pesos higher than in the second quarter of 2022, and 15 billion pesos higher than the previous year due to the bank's long dollar position and the peso depreciation during the quarter. In the third quarter of 2022, interest expenses totaled 73.7 billion pesos, 43% of 22.1 billion pesos increase compared to the second quarter of 2022, and 100% of 36.8 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increased 45% of $22.4 billion quarter-on-quarter, mainly driven by a 950 basis point increase in the average interest rate paid on deposits, while the average volume of private sector deposits increased 6%. On a yearly basis, interest on deposits increased 106% of $37.2 billion. In the third quarter of 2022, interest on deposits represented 98% of the bank's financial expenses. In the third quarter of 2022, the bank's net interest margin, including FX, was 28.1%, higher than the 24.7% posted in the second quarter of 2022 and the 19.1% registered in the third quarter of 2021. In the third quarter of 2022, net fee income totaled 14.2 billion pesos, 2% or 315 pesos million lower than in the second quarter of 2022. On a yearly basis, net fee income decreased 1% or 80 million pesos. In the first quarter of 2022, net income from financial assets and liabilities at fair value to profit or loss totaled 25.5 billion pesos gain, 183 or 16.5 billion pesos higher than in the previous quarter. This increase is mostly related to higher income from government securities, which increased 416% or 14.7 billion pesos. On a yearly basis, net income from financial assets and liabilities at fair value to profit or loss increased 304% or 19.2 billion pesos. In the quarter, other operating income totaled 3.7 million pesos, 20% or 911 million pesos lower compared to the second quarter of 2022. On a yearly basis, other operating income increased 16% of 517 million pesos. In the third quarter of 2022, Banco Marcos personal and administrative expenses totaled 26 million pesos, 3% or 854 million pesos lower than the previous quarter. Personal expenses decreased 4% while administrative expenses remained unchanged. On a yearly basis, personal and administrative expenses increased 5% or 1.2 million pesos. As of the third quarter of 2022, the efficiency ratio reached 29.1%, improving from the 31.2 posted in the second quarter of 2022. In the third quarter of 2022, expenses decreased 3%, while net interest income plus net fee income plus other operating income increased 23% compared to the second quarter of 2022. In the third quarter of 2022, The results from the monetary position totaled 58.3 billion pesos loss, 25% or 11.7 billion pesos higher than the loss posted in the second quarter of 2022 due to higher inflation observed in the quarter. 467 basis points above second quarter 2022 level. Inflation was 22% in the quarter compared to 17.3 in the second quarter of 2022. In the third quarter of 2022, Bank of America's expected tax rate was 46.7%, and more information is provided in note 22 in our financial statements. In terms of loan growth, the bank's financing to the private sector totaled 507 billion pesos, decreasing 7% of 37.2 billion pesos quarter-on-quarter, and 9% of 53.1 billion pesos lower year-on-year. Within commercial lending, overdraft and debt loans stand out, with an 18% decrease and 9% increase respectively. Meanwhile, within consumer lending, personal loans decreased 4%, while credit card loans decreased 6%. Within private sector financing, PESA financing decreased 6% or 33.3 billion pesos, while U.S. dollar financing decreased 26% or $63 million. It is important to mention that Bank of America's market share over private sector loans as of September 2022 reached 7.3%. On the funding side, Total deposits total 1.1 trillion pesos and increased 7% or 77.7 billion pesos quarter-on-quarter and 13% or 132.1 billion pesos higher year-on-year. Private sector deposits increased 5% quarter-on-quarter, while public sector deposits increased 32% quarter-on-quarter. The increase in private sector deposits was led by time deposits, which increased 7% of $34.5 billion, while demand deposits decreased 5% or $21.4 billion. Within private sector deposits, PESA deposits increased 10% or $94.3 billion, while U.S. dollar deposits decreased 45% or $289 million. As of September 2022, Bank of America's transactional accounts represented approximately 43% of total deposits. Bank of America's market share over private deposits as of September 2022 totaled 6.5%. In terms of asset quality, Bank of America's non-performing total financial ratio reached 1.27%, and the current ratio measured as total allowance under expected credit losses over non-performing loans under central bank rules totaled 153.13%. Consumer portfolio non-performing loans were unchanged at 1.23%, while commercial portfolio non-performing loans increased 15 basis points in the third quarter of 2022. In terms of capitalization, Banco Macro counted an excess capital of 351.9 billion pesos, which represented a total capital ratio of 40.4% and a tier one ratio of 36.1%. It should be noted that on May 12th, the Superintendents of the Central Bank Republic of Argentina In fact, it has decided to authorize Banco Macro to distribute profits in cash and or in kind for an aggregate amount of 19.7 billion pesos. And the distribution should be carried out in 12 monthly equal and consecutive installments. As of this date, the bank has paid 11 installments and will pay another one in December. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains more than appropriate, liquid assets, total deposit ratio, reached 90%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-atomized deposit base. At this time, we would like to take the questions you may have.

At this time, we're going to open it up for questions and answers. If you would like to ask a question, please press star 1 on your touchtone phone. Please unmute your phone and record your name clearly when prompted. One moment, please, for the first question. And the first question will come from Alonzo Garcia with Credit Suisse. Please go ahead.

Good morning, everyone, and thank you for taking my question. My question is regarding your exposure to the public sector, especially to the national treasury. I mean, I understand that in this environment, right, of negative real interest rates and very low credit demand. It's the way you can protect your shareholder's equity, right, from inflation. But is there, and I noticed that in this quarter you had, in relative terms, right, as a percentage of your total assets, you had a slight decline in your exposure to the public sector compared to the previous quarter. Just wanted to hear your thoughts on your exposure to the national treasury going forward. considering that next year most likely great demand might remain subdued and that interest rates might remain as well in negative territory in real terms. So I don't know if you have any kind of internal limits or anything, any color you can provide on this exposure going forward. Thank you.

Jorge Carinzi Hi, Alonso. Good morning. This is Jorge Carinzi. Honestly, we do not have an internal benchmark in terms of exposure to the public sector. This is ranging differently in the quarters, taking into consideration the behavior of interest rates, the different instruments that the Treasury is issuing in terms of getting debt from the market. Honestly, we feel comfortable with the exposure that we have. Again, this might change depending on the quarter. We think that the public sector debt has no problem to be renewed going forward. Perfect. That's my question. Thank you very much. Welcome, Alonso.

The next question will come from Nicholas River. with Bank of America. Please go ahead.

Thanks very much, Jorge and Nicolas, for taking my questions. I have two questions. Jorge, first, if you can give us a bit of an outlook for 2023 in terms of when do you expect to see – if you expect to see some recovery in credit demand next year. We have seen continued negative long growth in real terms, but if you can discuss the outlook for 2023 – as well as for NPLs and ROEs, where you're reporting ROEs very close to 10% in real terms, which I think is not bad compared to nominal ROEs and current inflation in our Latin banking markets. But if you can discuss again the outlook for long-growth NPLs and ROEs next year. And then second, more specific, I did see an increase on the net long position in dollars this quarter, which before was around $400 million. and it increased to about $1.2 billion in the quarter. If you can discuss what drove this increase, if it was deliberate, and if we should read it as the bank positioning for a stronger devaluation in the official exchange rate in the short term. Thanks.

Hi, Nicolas. How are you? On your first question, in terms of the outlook for 2023, And honestly, according to local economists, they are expecting a kind of a slowdown in economic activity. In 2022, real GDP is expected to be up close to 5%. And for next year, according to the consensus that we've seen, economists are expecting between 1% and 2% positive growth in Argentina. So kind of a slowdown compared to 2022. So in terms of the behavior of loan demands, we expect that nominal interest rate will continue at high levels. So we are not expecting a recovery in loan demand in real terms for 2023. Even though the slowdown, we are not expecting a pickup in NPLs. We believe that the level of coverage with provisions And what we are seeing in terms of the behavior of the different sectors in Argentina, we're not expecting a pickup there. So in terms of MPL, that could be ranging between the current level and the 1.5% along 2023. ROE, we are expecting to continue this level, ranging between 8% to 12% in positive levels. So not a big difference compared to what we are delivering right now. In terms of your second question, on the net long position in dollars, there are no changes in regulations, so banks can be 0% long in what is US dollars. The position of increase that you are seeing there is mainly driven by the increase in bonds linked to the dollars, and these bonds follow the behavior of the official effects. So that is the increase that you are seeing in the quarter. That is the way that we find in order to hedge the equity of the bank, both to the inflation, investing in bonds that are tied to the CER, that is the inflation behavior, and what we call the dollar-linked bonds that are in pesos that follow the depreciation of the official effects.

Okay, thanks very much for all of that, Jorge.

You're welcome, Nicolas. The next question will come from Carlos Gomez with HSBC. Please go ahead. Mr. Gomez, your line is open. The next question will come from Alejandro Herenda with ETAL. Please go ahead.

Hi, good morning. Hi, Jorge. I'm wondering, looking at the system and how a lot of banks are struggling in terms of profitability, what are you seeing? What's your view on the current situation of the system? And what do you think would be a way forward for the Argentine financial sector? And how do you picture macro playing on that process?

Hi, Alejandra. Thanks for your question. What we are seeing is that the banking sector in Argentina continues to be healthy, very liquid, both in pesos and in dollars. The only thing is that because we adjust our P&L to inflation, of course banks are suffering losses because of the net asset position there. But we continue to see profitability on average on the banking sector. Of course, it's much easier for banks as macro that has a much larger size than smaller banks. But overall, we believe and will continue to see that the health of the banking sector in Argentina is pretty good. Going forward, we think at some point, maybe not in 2023, but maybe in 2024, maybe in the second half of that year, if there is a new government at the end of 2023 with a more stabilization economic program, that could bring a bit more of stability and kind of demand from loans if inflation is going to go down. We have to wait until second half of 2024 for that to happen. So meanwhile, I think that banks will continue to show flat or negative real performance on loans, basically on the back of high nominal interest rates that we are having elections next year, good level of MPLs, ROEs ranging the area of 10, not big changes going forward, frankly.

Okay. If I may, a second one. You pointed out that you don't see loan growth for next year in real terms, which makes perfect sense. How do you balance profitability and exposure to the public sector? Thinking about that, are you thinking of lowering or try to lower the amount of deposits or... I don't know what you're thinking there, Jorge.

Yeah, Alejandra, if that would be the case of decreasing exposure to the public sector, we'd have to at some point decrease liabilities or deposits. Yes, of course. For the moment, that is not our view. We are going to keep on trading off profitability and exposure to the public sector. Again, we believe that... The debt with the central bank back on the LELICs are having no problems, and what we are seeing is that the debt on the treasury, that we use that to hedge our equity is showing good performance, and we are not seeing for the moment problem for the treasury to roll over the debt. Of course, this is a dynamic process, and we are going to continue monitoring that. This might change in the first or second quarter of next year, depending on market condition. If that would be the case, we are going to consider a reduction there. But for the moment, we feel pretty comfortable with the level of exposure to the public sector.

Thank you very much, Jorge.

Welcome, Alejandra.

The next question will come from Carlos Gomez with HSBC. Please go ahead.

Hello, Jorge, and apologies for the technical difficulties before. I want to get your opinion about your use of capital. Your capital ratio has been for a while. It's increasingly getting bigger and bigger. Is there any possibility to anticipate any M&A in the coming two years, or higher dividends, or do we have to wait until 2024 when the economic cycle might provide uses for that capital? Thank you.

Hi, Carlos. Good to hear from you. Thanks for the question. It's not easy. Honestly, we know that we have a huge excess of capital. The point here is that we depend on the central bank authorization on a higher dividend, and that is going to be discussed in March, April next year. I wouldn't be that positive there, so I think that my best scenario for next year is a kind of similar dividend than the one that we deliver this year. And of course we are always open to any M&A activity, depending of course on the target, depending on the price, but we believe that in the current conditions it is not easy to find out, but of course we are open to to every single transaction to be on the table.

Okay, but it doesn't sound like you think it is very likely.

No, I mean, this is, you know, that we are working in a not easy, let's say in that word, not easy environment. So we are trying to make the best use of the success capital. It is, again, it's quite difficult considering the current economic scenario in Argentina. So we are trying to find any potential solutions to that. Believe me that the board is committed on a monthly basis to do that, but for the moment, we are not finding further solutions to that.

Thank you very much.

Thanks, Carlos.

The next question will come from Santiago Pedri with Franklin Templeton. Please go ahead.

Hi, Jorge and Nicolas. Thanks for the call. My question is focused on the net income from financial assets of fair value through P&L line. I don't know if you could give us more color on the drivers of the big jump in this line. Was it a revolution of assets? Was it related to inflation? Sir, I would like to know if you can help us on the drivers of that line. Thank you.

Santiago, how are you? I mean, the concept we put in this line are basically the dollar lien bonds and what we call the dualis bond that can be adjusted by inflation or to the performance of the effects, the higher. So these bonds are mark-to-market. They are, you could see volatility in the quarterly performance of this line depending on how the prices of these bonds evolve. So basically, those are the main important elements on this line.

Okay, thanks. Thanks a lot.

There are no questions at this time. This concludes the question and answer session. I would like to turn the conference back over to Mr. Nicholas Torres for any final considerations. Please go ahead.

Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day.

The call has now concluded. Thank you for your participation. You may now disconnect.